Did American Capitalism Take a Wrong Turn?

Hedrick Smith is a capitalist, he reminds me midway through our conversation about his new book, “Who Stole the American Dream?” (557 pages, Random House, $30.00). He spent time as a correspondent for The New York Times in Moscow and saw up close the evils of Russian communism. And for 20 years, he has run his own production company, which has produced more than 20 award-winning PBS prime time specials and miniseries. “I have had to meet payrolls,” notes the Pulitzer Prize-winning journalist who was part of the Pentagon Papers reporting team.

But in his new book, Smith finds plenty wrong with how American capitalism has evolved over the past 40 years. He says a stream of political and corporate decisions have dismantled the middle-class dream of a steady job with decent pay and benefits, rising living standards, home ownership, a secure retirement and the hope that your children will enjoy a better future.

“We are no longer one large American family with shared prosperity and shared political and economic power, as we were in the decades following World War II,” Smith writes. Instead, he finds, we are a “sharply divided country” where “Constant conflict has replaced a sense of common purpose and the pursuit of the common welfare.”

He traces the start of this division to a “business rebellion” sparked by a memorandum that corporate attorney (and future Supreme Court justice) Lewis Powell wrote in 1971. The period had been marked by the rise of the consumer and environmental movements, and a strong labor lobby. The pragmatic Richard Nixon presided over creation of the Environmental Protection Agency, the Occupational Safety and Health Administration and other agencies designed to protect consumers or regulate the activities of businesses.

“Powell thought American industry was literally in mortal danger,” Smith told me. And as a result, Powell wrote a memorandum that urged business leaders to get politically active. “Come to Washington, lobby, form organizations, develop a long-term plan, pool your resources, stop fighting among yourselves, identify your enemies, go after them vigorously, punish them,” Smith recounts.

Powell’s call to arms found fertile ground. The number of companies with Washington offices increased from 175 in 1971 to 2,445 a decade later. Conservative think tanks like the Heritage Foundation and the Cato Institute were established and leading CEOs formed the Business Roundtable. Today, more than 50,000 people are employed by business trade groups.

In ensuing years, corporate America put its new political muscle to work, Smith argues, as “Powell’s Army” either defeated bills designed to benefit lower-income families or passed pro-business laws such as the 401(k), corporate bankruptcy rules, tax laws and deregulation. A new mindset arose in the business community, he says, which saw “Washington as an arena in which business could pursue its interests and there could be enormous financial payoffs.”

Over the years, Smith says, there has been a growing divergence between the fortunes of business and of the middle class. From 1948-1973, productivity in the U.S. rose 96.8% while the hourly compensation for workers went up 93.7%. But since 1973, productivity has risen 80% and hourly compensation has increased just 10%.

Over the last four decades, says Smith, many corporate leaders have lost their sense of social responsibility as stakeholder capitalism has been replaced by a “single-minded focus” on shareholder value.

If Smith is unhappy with the course of American business, he is encouraged by the renewed interest in manufacturing. “Manufacturing is the absolute core of an economy,” he says, noting it provides above-average pay and benefits and has a strong multiplier effect on the economy. But he contrasts how Germany has kept 21% of its workforce in manufacturing with the 9% in the U.S.

“You see them with higher wages, more manufacturing and a trade surplus when we have lower wages, less manufacturing and a trade deficit,” he says. “It is a huge red flag about our strategies.”

Smith doesn’t buy the argument that the U.S. manufacturing sector can be healthy without growth in manufacturing employment. He cites Andrew Grove’s concern that “when you move the production offshore, you are putting at risk the cycle of innovation, the great American advantage of being able to create new products, new methods and completely new industries.” When that happens, Smith says, the economy should be spurring growth and providing job opportunities in new companies and industries.

Apple is one of the bright lights of American innovation, but Smith says the U.S. economy is not getting the full benefit of its success because Apple has Foxconn manufacture its products in China. While Foxconn employs 700,000 in production, Apple employs 43,000 domestically, including 30,000 in its retail stores.

“Apple represents the disconnect in the American mindset,” he says. “Americans think of themselves as consumers first and workers second. And so if they are getting a great product, they don’t care so much how they got it.” He says the result of that pursuit of cheaper prices at the store is that Americans end up working for lower wages.

So what will help the country restore the American Dream? Smith lays out a 10-step strategy, one of which is to generate a manufacturing renaissance, in part by promoting “buy American” policies. But Smith’s most fervent hope is that average Americans will “organize at the grass roots, as the Tea Party did, and then put ourselves on the line.” He says Americans are “enormously unhappy” with the current state of affairs, but for change to occur, “We the People must take action.”